Housewives Outmaneuver UBS, Deutsche Bank Trading Yen (Update4)
By Kosuke Goto
June 18 (Bloomberg) -- Japanese businessmen, housewives and pensioners Gambling against the yen in their spare time are Ticking the Predictions of the world's biggest currency traders.
The yen has shrunk 4.6 percent to a 4 1/2-year low against the dollar this quarter, which makes it the worst performer among 72 major currencies and confounding predictions by egists at Deutsche Bank AG and UBS AG for gains of about 1 percent.
The banks did not guess on the risk appetite of Japanese people, who are borrowing money like never before to buy currencies with higher yields. They tripled their trading at the year ended March to a record $11 billion a day, based on Tokyo-based Yano Research Institute Ltd., publisher of an yearly report on the business. Globally, currency trading by retail investors climbed 54 percent in 2006, according to research firm Greenwich Associates in Greenwich, Connecticut.
Japan's interest rates are too low,” said Hiroshi Ono, a 40-year-old sales clerk at a telephone company in Tokyo. Ono said he's made roughly $17,000 since March by calculating $200,000 of yen and buying U.S. dollars to take advantage of the 4.75 percentage-point gap between Japanese and U.S. interest rates.
Japanese traders are borrowing yen at the central bank's 0.5 percent overnight lending rate and buying higher-yielding currencies in New Zealand, both the U.K., Australia as well as Brazil to increase returns on 1,536 trillion yen ($12.5 trillion) in savings. The egy is called the carry trade.
Still Alive
Japan's fast rate, the lowest among major economies, is 7.5 percentage points less than New Zealand's key rate and 3.5 percentage points below the European Central Bank.
Japan's margin traders have the power to support currencies from the yen,” said Derek Halpenny, a egist at London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest lender. We estimate they constitute 15 percent of yen trading at Tokyo hours. Maybe more.”
The yen increased 1.4 percent a week to 123.44 per dollar and dropped 1.5 percent to 165.26 to the euro. The currency fell to a record low of 165.60 per euro today. Halpenny forecasts the yen will reach 125 per dollar before ending Sept. 30 at 123.
The yen carry trade remains living,” said Koji Fukaya, senior currency egist at Tokyo at Deutsche Securities, a Deutsche Bank subsidiary. Capital outflows from Japan stay stable and more than we ever anticipated.”
Unwinding Carry Trades
The Frankfurt-based bank, the largest currency trader based on Euromoney magazine, prediction at the end of March the yen would exchange at 117 per dollar by June 30, matching the median of 39 analysts, traders and investors in a Bloomberg News survey. Zurich-based UBS, rated second, called 116.
In late December, Deutsche Bank forecast the yen would climb to 113 yen by the end of their first quarter and UBS called 111. It dropped to 117.83.
UBS and Deutsche Bank are adhering to their forecasts for a stronger yen, stating central bank curbs on money supply will probably starve the carry trade.
Tighter global liquidity will contribute to greater volatility and enable the yen to strengthen since the carry trade is unwound,” said ley Davies, currency egist at Singapore at UBS, which expects the yen to profit to 121 per dollar per month and to 117 in three months.
Bane of Pros
Retail investors' egy of selling yen during rallies helped shove volatility implied by one-month dollar-yen choices on June 5 to 5.85 percent, the lowest as the Bank of Japan began compiling data from August 1992, in comparison with 10.15 percent on March 5. Volatility may encourage carry trades, as it implies smaller exchange-rate fluctuation risk.
They are the bane of professional currency traders,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex Ueda Harlow Ltd., who has been trading at Japan's capital city for 25 decades. It's becoming hard to earn money as the dollar-yen does not move because it used to, because of their continuous buying on dips.”
Global trading by shareholders aside from banks, fund managers and companies surged 54 percent last year, said Peter D'Amario, a consultant at Greenwich Associates. The egory, including retail investors, accounted for 16 percent of transactions managed by 1,700 businesses surveyed, a year 27, up from 10 percent. It grew 80 percent in Europe, 55 percent in Asia Pacific and 30% from the Americas.
In Japan, people have started 600,000 so-called margin trading accounts at brokerages that give money for currency bets, 80 percent more than a year ago, according to Yano Research.
Buying on Dips
Once the yen climbed to a two-week high of 162.20 from the euro on May 25, Naoko Ogawa, a 34-year-old freelance author, used a 1,000 euro ($1,300) deposit to buy 10,000 euros. She sold four days later, close to a then-record packed with 164.29 yen.
You just need to buy the dollar and the euro on dips, then offer them at a profit,” said Ogawa, who added she has made a 20 percent return on her 1 million yen trading account since December. ”It's better than stock trading, since you are able to depend on daily interest”
Deposits in margin trading brokerages have risen 60 percent to $4.9 billion in the past year, Yano Research found. While that is roughly 2% of the $272 billion which Japanese people have put into mutual funds which invest borrowing typically makes their positions 10 to 30 times larger.
Actual, Lira
Japanese traders stepped up their purchases of their New Zealand dollar when the Reserve Bank of New Zealand marketed its currency on June 11, weakening the so-called kiwi by up to 1.8 percent.
Margin traders' net long positions from the New Zealand dollar against the yen doubled to $347 million on that afternoon from $180 million on June 8, based on data in Tokyo Financial Exchange. Long positions are bets that a currency will grow. A carry trade that bought the New Zealand dollar funded with yen could have returned 14 per cent this year.
The country's dollar dropped this afternoon on speculation the Reserve Bank sold its currency for a second time, just to rally from the day to a 19-year high against the yen.
Deutsche Bank officials started weekly visits with 30 Japanese margin trading brokerages following the orders they channel through the company doubled in a year, said Drew Bradford, head of global finance and foreign exchange in Tokyo, in which the lender's currency earnings team has tripled to 17 in a year.
The growth is phenomenal,” he said. ”They are buying pounds, Australian and New Zealand dollars. The more adventurous are looking at the Brazilian real and Turkish lira.”
Highlighting Risk
In an April report, the Bank of Japan highlighted the risk that investors can make imprudent decisions based on”favorable” assumptions about foreign-exchange and interest rates.
Governor Toshihiko Fukui followed that with another warning, stating expectations that rates will stay low could invite”inefficient” investment.
If bond and stock markets or the yen carry trade become unbalanced and unwind, which could have a negative effect on the market,” he told lawmakers on June 5.
After the carry trade dropped in 1998 following Russia's debt default, the yen jumped 20 percent in under two months. The largest challenge to the egy this season came when Chinese stocks slumped on Feb. 27, prompting fund managers to cut riskier investments and pay back yen loans. The yen climbed 2.3 percent in a single day, the largest gain since July 2005.
Hire the Housewife
Japan's recovery has actually helped to weaken the yen by increasing the desire of local investors for risk, said Masafumi Yamamoto, currency economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan currency trader.
It's probably Japanese retail investors will continue to increase their foreign currency exposure, particularly to that of high-yielding currencies like the New Zealand dollar,” he said.
Yukiko Ikebe, a 59-year-old housewife at Tokyo, in April was indicted for evading about 139 million yen in income taxation while making 407 million yen trading foreign-exchange, according to the Tokyo District Public Prosecutors Office.
She has to have earned more money than individuals,” joked Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. Said for my colleagues, let us loe her and hire her”'
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